Kate bought residential rental property for $500,000.She reported a total of $100,000 of straight-line depreciation.Kate sells the building in 2017 for $425,000.What are the immediate tax consequences of the sale? (Do not consider Kate's other transactions).
I.If Kate's rental activity is a production-of-income (investment)activity,she will report a $25,000 long-term capital gain.
II.If Kate's rental activity is a trade or business,she will report $25,000 of Unrecaptured Section 1250 gain.

Question

Kate bought residential rental property for $500,000.She reported a total of $100,000 of straight-line depreciation.Kate sells the building in 2017 for $425,000.What are the immediate tax consequences of the sale? (Do not consider Kate's other transactions).
I.If Kate's rental activity is a production-of-income (investment)activity,she will report a $25,000 long-term capital gain.
II.If Kate's rental activity is a trade or business,she will report $25,000 of Unrecaptured Section 1250 gain.
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Quizplus · Accepted Answer

Kate's adjusted basis in the property is $400,000 ($500,000 - $100,000 depreciation). Selling for $425,000 results in a $25,000 gain. As a trade or business, this gain is Unrecaptured Section 1250 gain, taxed at a maximum rate of 25%.

Kate Bought Residential Rental Property for $500,000